System, Method and Computer Program Product for Selecting and Weighting a Subset of a Universe to Create an Accounting Data Based Index and Portfolio of Financial Objects, as amended

ABSTRACT

A system, method and computer program product creates an index based on accounting based data, as well as a portfolio of financial objects based on the index where the portfolio is weighted according to accounting based data. A passive investment system may be based on indices created from various metrics. The indexes may be built with metrics other than market capitalization weighting, price weighting or equal weighting. Non-financial metrics may also be used to build indexes to create passive investment systems. Additionally, a combination of financial non-market capitalization metrics may be used along with non-financial metrics to create passive investment systems. Once the index is built, it may be used as a basis to purchase securities for a portfolio. Specifically excluded are widely-used capitalization-weighted indexes and price-weighted indexes, in which the price of a security contributes in a substantial way to the calculation of the weight of that security in the index or the portfolio, and equal weighting weighted indexes. Valuation indifferent indexes avoid overexposure to overvalued securities and underexposure to undervalued securities, as compared with conventional capitalization-weighted and price-weighted.

CROSS-REFERENCE TO RELATED APPLICATION

The present application claims the benefit of U.S. Patent ApplicationNo. 60/751,212, Confirmation No. 7679, (Attorney Docket No.43622-226758) filed Dec., 19, 2005 previously entitled “Using aFundamental Index to Create a Portfolio of Assets,” entitled “UsingAccounting Data Based Indexing to Create a Portfolio of Assets” toRobert D. Arnott, of common assignee to the present invention, thecontents of which are incorporated herein by reference in theirentirety.

The present application also claims the benefit of and is also acontinuation-in-part of U.S. patent application Ser. No. 11/196,509,filed Aug. 4, 2005, which is a continuation-in-part of U.S. patentapplication Ser. No. 10/961,404, entitled “Non-Capitalization WeightedFundamental Indexing System, Method and Computer Program Product,” toArnott, (Attorney Docket No. 43622-208053), filed Oct. 12, 2004, (whichclaims the benefit of U.S. Provisional Patent Application No.60/541,733, entitled “Securities Indexing,” to Arnott, (Attorney DocketNo. 43622-204086, formerly 51804/FLC/A750), filed Feb. 4, 2004), andU.S. patent application Ser. No. 10/159,610, entitled “Fundamental StockMarket Index and Index Fund or Funds,” filed Jun. 3, 2002, all of whichare of common assignee to the present invention, and all of the contentsof which are incorporated herein by reference in their entireties.

BACKGROUND OF THE INVENTION

1. Field of the Invention

The present invention relates generally to securities investing, andmore particularly to construction and use of indexes and portfoliosbased on indexes.

2. Related Art

Conventionally, there are various broad categories of securitiesportfolio management. One conventional securities portfolio managementcategory is active management wherein the securities are selected for aportfolio individually based on economic, financial, credit, and/orbusiness analysis; on technical trends; on cyclical patterns; etc.Another conventional category is passive management, also calledindexing, wherein the securities in a portfolio duplicate those thatmake up an index. The securities in a passively managed portfolio areconventionally weighted by relative market capitalization weighting orequal weighting. Another middle ground conventional category ofsecurities portfolio management is called enhanced indexing, in which aportfolio's characteristics, performance and holdings are substantiallydominated by the characteristics, performance and holdings of the index,albeit with modest active management departures from the index.

The present invention relates generally to the passive and enhancedindexing categories of portfolio management. A securities market index,by intent, reflects an entire market or a segment of a market. A passiveportfolio based on an index may also reflect the entire market orsegment. Often every security in an index is held in the passiveportfolio. Sometimes statistical modeling is used to create a portfoliothat duplicates the profile, risk characteristics, performancecharacteristics, and securities weightings of an index, without actuallyowning every security included in the index. (Examples could beportfolios based on the Wilshire 5000 Equity Index or on the LehmanAggregate Bond Index.) Sometimes statistical modeling is used to createthe index itself such that it duplicates the profile, riskcharacteristics, performance characteristics, and securities weightingsof an entire class of securities. (The Lehman Aggregate Bond Index is anexample of this practice.)

Indexes are generally all-inclusive of the securities within theirdefined markets or market segments. In most cases indexes may includeeach security in the proportion that its market capitalization bears tothe total market capitalization of all of the included securities. Theonly common exceptions to market capitalization weighting are equalweighting of the included securities (for example the Value Line indexor the Standard & Poors 500 Equal Weighted Stock Index, which includesall of the stocks in the S&P 500 on a list basis; each stock given equalweighting as of a designated day each year) and share price weighting,in which share prices are simply added together and divided by somesimple divisor (for example, the Dow Jones Industrial Average).Conventionally, passive portfolios are built based on an index weightedusing one of market capitalization weighting, equal weighting, and shareprice weighting.

Most commonly used stock market indices are constructed using amethodology that is based upon either the relative share prices of asample of companies (such as the Dow Jones Industrial Average) or therelative market capitalization of a sample of companies (such as the S&P500 Index or the FTSE 100 Index). The nature of the construction of bothof these types of indices means that if the price or the marketcapitalization of one company rises relative to its peers it is accordeda larger weighting in the index. Alternatively, a company whose shareprice or market capitalization declines relative to the other companiesin the index is accorded a smaller index weighting. This can create asituation where the index, index funds, or investors who desire theirfunds to closely track an index, are compelled to have a higherweighting in companies whose share prices or market capitalizations havealready risen and a lower weighting in companies that have seen adecline in their share price or market capitalization.

Advantages of passive investing include: a low trading cost ofmaintaining a portfolio that has turnover only when an index isreconstituted, typically once a year; a low management cost of aportfolio that requires no analysis of individual securities; and nochance of the portfolio suffering a loss—relative to the market ormarket segment the index reflects—because of misjudgments in individualsecurities selection.

Advantages of using market capitalization weighting as the basis for apassive portfolio include that the index (and therefore a portfoliobuilt on it) remains continually ‘in balance’ as market prices for theincluded securities change, and that the portfolio performanceparticipates in (i.e., reflects) that of the securities market or marketsegment included in the index.

The disadvantages of market capitalization weighting passive indexes,which can be substantial, center on the fact that any under-valuedsecurities are underweighted in the index and related portfolios, whileany over-valued securities are over weighted. Also, the portfolio basedon market capitalization weighting follows every market (or segment)bubble up and every market crash down. Finally, in general, portfoliosecurities selection is not based on a criteria that reflects a betteropportunity for appreciation than that of the market or market segmentoverall.

Most commonly used stock market indices are constructed using amethodology that is based upon either the relative share prices of asample of companies (such as the Dow Jones Industrial Average) or therelative market capitalization of a sample of companies (such as the S&P500 Index or the FTSE 100 Index). The nature of the construction of bothof these types of indices means that if the price or the marketcapitalization of one company rises relative to its peers it is accordeda larger weighting in the index. Alternatively, a company whose shareprice or market capitalization declines relative to the other companiesin the index is accorded a smaller index weighting. This can create asituation where the index, index funds, or investors who desire theirfunds to closely track an index, are compelled to have a higherweighting in companies whose share prices or market capitalizations havealready risen and a lower weighting in companies that have seen adecline in their share price or market capitalization.

Price or market capitalization based indices can contribute to a‘herding’ behavior on the behalf of investors by effectively compellingany of the funds that attempt to follow these indices to have a largerweighting in shares as their price goes up and a lower weighting inshares that have declined in price. This creates unnecessary volatility,which is not in the interests of most investors. It may also lead toinvestment returns that have had to absorb the phenomenon of having torepeatedly increase weightings in shares after they have risen andreduce weightings in them after they have fallen.

Capitalization-weighted indexes (“cap-weighted indexes”) dominate theinvestment industry today, with approximately $2 trillion currentlyinvested. Unfortunately, cap-weighted indexes suffer from an inherentflaw as they overweight all overvalued stocks and underweight allundervalued stocks. This causes cap-weighted indexes to under-performrelative to indexes that are immune to this shortcoming. In addition,cap-weighted indexes are vulnerable to speculative bubbles and emotionalbear markets which may unnaturally drive up or down stock pricesrespectively.

It is a well established empirical conclusion of investment theory thatcap-weighting is not mean-variance optimal. This conclusion holdsbecause weighting schemes based on market price, includingcap-weighting, overweight 100% of overvalued stocks and underweight 100%of undervalued stocks. Both mathematically and empirically, this overand under weighting problem inherent to cap-weighting leads to a returndrag of 200 bps per year in the U.S. and more than 200 bps per yearinternationally.

One example of the phenomenon comes from the recent stock market bubbleof 1997-2000, when, e.g., Internet network service provider Ciscocomprised nearly 5% of the S&P 500. At its peak in 2000, Cisco traded at$70 per share. Since March 2000, Cisco has fallen to approximately 12%of its peak, dragging down S&P 500 performance of which it comprised 5%.

While it is difficult or impossible to know the true fair value of acompany, what is known is that if an overvalued company's weight in anindex is determined by market capitalization, then the company will beover-weighted in the index. Conversely, if a company's weight isdetermined by market capitalization and it is undervalued, it will beunderweighted in a capitalization-weighted index.

Over the past 40 years, the largest stock by market capitalization inthe S&P 500 has underperformed the average stock in the index over a10-year time period by an average of 40%. The largest 10 stocks bymarket capitalization have underperformed the average stock over thesubsequent 10-year time frame by an average of 26%. Yet, cap-weightedindexes continue to invest 20-30% of their value in the largest 10stocks by market cap, despite the fact that they under-perform theaverage stock in the index, because the stocks are selected and weightedusing market capitalization, which by its nature over-weights overvalued stocks and under-weights undervalued stocks.

Equal-weighted indexation is a popular alternative to cap-weighting butone that suffers from its own shortcomings. One significant problem withequal-weighted indexes is that they come out of the same cap-weighteduniverses as cap-weighted indexes. For example, the S&P Equal WeightedIndex simply re-weights the 500 equities that comprise the S&P 500,retaining the bias already inherent to cap-weighted indexes.

High turnover and associated high costs are additional problems ofequal-weighted indexes. Equal-weighted indexes include small illiquidstocks, which are required to be held in equal proportion to the larger,more liquid stocks in the index. These small illiquid stocks must betraded as often as the larger stocks but at a higher cost because theyare less liquid.

What is needed then is an improved method of weighting financial objectsin a portfolio based on an index that overcomes shortcomings ofconventional solutions.

SUMMARY OF THE INVENTION

In an exemplary embodiment of the present invention a system, method andcomputer program product for index construction and/or portfolioweighting is disclosed.

Exemplary embodiments of the present invention may use accounting databased indexing, i.e., accounting data based measures of firm size,rather than market capitalization, to construct a stock index. Byavoiding the inherent valuation bias of cap-weighted indexes, accountingdata based indexes (ADBI) may outperform cap-weighted indexes by as muchas 200 bps in the US and by more than 250 bps internationally, based onextensive back testing (to 1962 in the US and to 1988 internationally).

An exemplary embodiment may use four specific metrics in ADBIconstruction: book equity value; income (free cash flow); sales; andgross dividends. An ADBI construction strategy may offer severaladvantages. For example, ADBI may outperform cap-weighted indexes.Additionally, ADBI may be adaptable to distinct strategies. ADBI may beused to construct either large or small company indexes, industry sectorindexes, geographic indexes and others. ADBI may also effectively limitportfolio risk by providing the benefits of traditional cap-weightedindexes, including diversification, broad market participation,liquidity and low turnover, while generating incrementally higherreturns with somewhat lower volatility than comparable cap-weightedindexes. ADBI may also provide protection against market bubbles andfads because a stock's weight in the index is immune to errors in stockvaluation.

In an exemplary embodiment, the present invention may be a method ofconstructing a portfolio of financial objects, including the steps of:purchasing a portfolio of a plurality of mimicking financial objects toobtain and/or create a mimicking portfolio, where performance of theportfolio of mimicking financial objects substantially mirrors theperformance of an accounting data based index based portfolio withoutsubstantially replicating the accounting data based index basedportfolio.

The embodiment may further include: obtaining and/or using a risk modelfor the portfolio of mimicking financial objects, where the risk modelmirrors a risk model of the accounting data based index.

The performance of the portfolio of mimicking financial objects maysubstantially mirror the performance of the accounting data based indexbased portfolio without substantially replicating financial objectsand/or weightings in the accounting data based index based portfolio.The risk model may be substantially similar to the Fama-French factors,where the Fama-French factors may include at least one of size effect,value effect, and/or momentum effect.

A financial object may include: at least one unit of interest in atleast one of: an asset; a liability; a tracking portfolio; a financialinstrument and/or a security, where the financial instrument and/or thesecurity denotes a debt, an equity interest, and/or a hybrid; aderivatives contract, including at least one of: a future, a forward, aput, a call, an option, a swap, and/or any other transaction relating toa fluctuation of an underlying asset, notwithstanding the prevailingvalue of the contract, and notwithstanding whether such contract, forpurposes of accounting, is considered an asset or liability; a fund;and/or an investment entity or account of any kind, including aninterest in, or rights relating to: a hedge fund, an exchange tradedfund (ETF), a fund of funds, a mutual fund, a closed end fund, aninvestment vehicle, and/or any other pooled and/or separately managedinvestments.

In another exemplary embodiment, the present invention may be a methodof constructing a portfolio of financial objects, including the stepsof: purchasing a plurality of financial objects according to weightingssubstantially similar to the weightings of an accounting data basedindex, where performance of the plurality of financial objectssubstantially mirrors the performance of the accounting data based indexwithout using substantially the same financial objects in the accountingdata based index.

The financial object may include: at least one unit of interest in atleast one of: an asset; a liability; a tracking portfolio; a financialinstrument and/or a security, where the financial instrument and/or thesecurity denotes a debt, an equity interest, and/or a hybrid; aderivatives contract, including at least one of: a future, a forward, aput, a call, an option, a swap, and/or any other transaction relating toa fluctuation of an underlying asset, notwithstanding the prevailingvalue of the contract, and notwithstanding whether such contract, forpurposes of accounting, is considered an asset or liability; a fund;and/or an investment entity or account of any kind, including aninterest in, or rights relating to: a hedge fund, an exchange tradedfund (ETF), a fund of funds, a mutual fund, a closed end fund, aninvestment vehicle, and/or any other pooled and/or separately managedinvestments.

In another exemplary embodiment, the present invention may be a methodof constructing a portfolio of financial objects, including the stepsof: determining overlapping financial objects appearing in both anaccounting data based index (ADBI) and a conventional weighted index,where the conventionally weighted index may includes an index weightedbased on at least one of capitalization, equal weighting, and/or shareprice weighting, and where the ADBI may includes weighting based on atleast one accounting data based factor and not based on any ofcapitalization, equal weighting, and/or share price weighting index;comparing weightings of the overlapping financial objects in the ADBIwith weightings of the overlapping financial objects in theconventionally weighted index; and purchasing at least one financialobject based on the comparing.

The purchasing may include at least one of: purchasing a long positionin at least one overlapping financial object when the comparingindicates the at least one overlapping financial object is over weightedin the non-capitalization weighted index relative to the conventionalindex; and/or purchasing a short position in at least one overlappingfinancial object when the comparing indicates the at least oneoverlapping financial object is underweighted in the non-capitalizationweighted index relative to the conventional index.

The purchasing of the long and/or short positions may be implemented byusing total return swaps. The long and/or short positions may be heldfor one year.

The embodiment may further include rebalancing the portfolio. Therebalancing may include: at least one of creating new long and/or shortpositions using cash flow from new capital contributions, and/oraltering existing long and/or short positions using cash flow from newcapital contributions.

The embodiment may further include using leverage to obtain the longand/or short positions.

The comparing may include calculating a difference between theweightings, and/or calculating a difference between arithmeticallymodified values of the weightings. The arithmetically modified values ofthe weightings may include square roots of the weightings.

The comparing may include calculating a difference based on tiers ofweightings using stratified sampling.

The financial object may include: at least one unit of interest in atleast one of: an asset; a liability; a tracking portfolio; a financialinstrument and/or a security, where the financial instrument and/or thesecurity denotes a debt, an equity interest, and/or a hybrid; aderivatives contract, including at least one of: a future, a forward, aput, a call, an option, a swap, and/or any other transaction relating toa fluctuation of an underlying asset, notwithstanding the prevailingvalue of the contract, and notwithstanding whether such contract, forpurposes of accounting, is considered an asset or liability; a fund;and/or an investment entity or account of any kind, including aninterest in, or rights relating to: a hedge fund, an exchange tradedfund (ETF), a fund of funds, a mutual fund, closed end fund, aninvestment vehicle, and/or any other pooled and/or separately managedinvestments.

In another exemplary embodiment, the present invention may be a methodof constructing a portfolio of financial objects, including the stepsof: determining non-overlapping financial objects appearing in only oneof either an accounting data based index (ADBI) or a conventionalweighted index by comparing financial objects in an ADBI with financialobjects in a conventionally weighted index, where the conventionallyweighted index may includes conventionally weighting based on at leastone of capitalization, equal weighting, and/or share price weighting,and where the ADBI may includes accounting data based weighting on atleast one accounting data based factor and not based on any ofcapitalization, equal weighting, and/or share price weighting index;weighting the non-overlapping financial objects appearing only in theADBI by accounting data based weighting; weighting the non-overlappingfinancial objects appearing only in the conventionally weighted index bythe conventional weighting; and purchasing financial objects based onthe weightings.

The accounting data based weighting may include: (a) gathering dataabout a plurality of financial objects; (b) selecting a plurality offinancial objects to create an index of financial objects; and (c)weighting each of the plurality of financial objects selected in theindex based on an objective measure of scale based on accounting data ofa company associated with each of the plurality of financial objects,where the weighting may include: (i) weighting at least one of theplurality of financial objects based on accounting data; and (ii)weighting other than weighting based on at least one of marketcapitalization, equal weighting, and/or share price weighting.

The embodiment may further include weighting each of the plurality offinancial objects, where the each of the financial objects may include:at least one unit of interest in at least one of: an asset; a liability;a tracking portfolio; a financial instrument and/or a security, wherethe financial instrument and/or the security denotes a debt, an equityinterest, and/or a hybrid; a derivatives contract, including at leastone of: a future, a forward, a put, a call, an option, a swap, and/orany other transaction relating to a fluctuation of an underlying asset,notwithstanding the prevailing value of the contract, andnotwithstanding whether such contract, for purposes of accounting, isconsidered an asset or liability; a fund; and/or an investment entity oraccount of any kind, including an interest in, or rights relating to: ahedge fund, an exchange traded fund (ETF), a fund of funds, a mutualfund, closed end fund, an investment vehicle, and/or any other pooledand/or separately managed investments.

The embodiment may further include weighting each of the plurality offinancial objects, where the each of the financial objects may include astock.

The objective measures of scale may include weighting based on anydividends, book value, cash flow, and/or revenue. The embodiment mayfurther include equally weighting each objective measure of scale.

The embodiment may further include weighting based on the objectivemeasure of scale, where the objective measure of scale may include ameasure of company size associated with each of the plurality offinancial objects.

The measure of company size may include at least one of: inventory,revenue, sales, income, book income, taxable income, earnings growthrate, earnings before interest and tax (EBIT), earnings before interest,taxes, depreciation and amortization (EBITDA), retainer earnings, numberof employees, capital expenditures, salaries, book value, assets, fixedassets, current assets, quality of assets, operating assets, intangibleassets, dividends, gross dividends, dividend yields, cash flow,liabilities, losses, long term liabilities, short term liabilities,liquidity, long term debt, short term debt, bonds, corporate bonds, networth, shareholder equity, goodwill, research and developmentexpenditures, costs, cost of goods sold (COGS), and/or research anddevelopment costs.

The financial object may include: at least one unit of interest in atleast one of: an asset; a liability; a tracking portfolio; a financialinstrument and/or a security, where the financial instrument and/or thesecurity denotes a debt, an equity interest, and/or a hybrid; aderivatives contract, including at least one of: a future, a forward, aput, a call, an option, a swap, and/or any other transaction relating toa fluctuation of an underlying asset, notwithstanding the prevailingvalue of the contract, and notwithstanding whether such contract, forpurposes of accounting, is considered an asset or liability; a fund;and/or an investment entity or account of any kind, including aninterest in, or rights relating to: a hedge fund, an exchange tradedfund (ETF), a fund of funds, a mutual fund, a closed end fund, aninvestment vehicle, and/or any other pooled and/or separately managedinvestments.

In another exemplary embodiment, the present invention may be a method,executed on a data processing system, including the steps of: creatingan accounting data based index (ADBI) based on accounting dataincluding: selecting a universe of financial objects, and selecting asubset of the universe based on the accounting data to obtain the ADBI;creating a portfolio of financial objects using the ADBI, includingweighting the financial objects in the portfolio according to a measureof value of a company associated with each financial object in theportfolio.

The universe may include at least one of: a sector; a market; a marketsector; an industry sector; a geographic sector; an internationalsector; a sub-industry sector; a government issue; and/or a tax exemptfinancial object.

The accounting based data used in weighting as a measure of value of thecompany associated with the financial object, may include at least oneof: any dividends; revenue; cash flow; and/or book value.

The accounting based data may be weighted relatively dependent on thegeography of the company associated with the financial object.

The financial object may include: at least one unit of interest in atleast one of: an asset; a liability; a tracking portfolio; a financialinstrument and/or a security, where the financial instrument and/or thesecurity denotes a debt, an equity interest, and/or a hybrid; aderivatives contract, including at least one of: a future, a forward, aput, a call, an option, a swap, and/or any other transaction relating toa fluctuation of an underlying asset, notwithstanding the prevailingvalue of the contract, and notwithstanding whether such contract, forpurposes of accounting, is considered an asset or liability; a fund;and/or an investment entity or account of any kind, including aninterest in, or rights relating to: a hedge fund, an exchange tradedfund (ETF), a fund of funds, a mutual fund, a closed end fund, aninvestment vehicle, and/or any other pooled and/or separately managedinvestments.

In another exemplary embodiment, the present invention may be acomputer-implemented method for construction and management of an indexand at least one index fund containing a portfolio of financial objectsbased on the index, where weighting of the index is based on accountingbased data rather than on stock prices or market capitalization or equalweighting, the computer-implemented method including the steps of:creating an index, and at least one index fund containing a portfolio offinancial objects, where the constituent weightings of the companiesissuing the financial objects in the index fund are based uponaccounting based data regarding the companies associated with thefinancial objects, where the accounting based data may includes anydividends, cash flow, revenues, and/or book value.

The embodiment may further include: creating the index, and the at leastone index fund containing a portfolio of financial objects where theconstituent weightings are based upon any ratio of accounting baseddata, or any manipulation of accounting based data, that is containedwithin a standard company annual report and accounts.

The embodiment may further include: creating the index, and the at leastone index fund containing a portfolio of financial objects where theconstituent weightings are based upon any ratio of accounting based dataper share, or any manipulation of accounting based data, that iscontained within a standard company annual report and accounts.

The embodiment may further include: managing an accounting based dataindex, and at least one index fund containing a portfolio of financialobjects based on the index including: altering the relative weightingsof the financial objects within the at least one index fund as theaccounting based data concerning the companies associated with thefinancial objects changes.

The altering may include at least one of: altering based on at least oneof: changes in relative weightings of financial objects in the index;and/or changes in the financial objects that are members of the indexoutside the sample changes; and/or altering at the time of at least oneof when, and/or after at least one company associated with a financialobject of the index reports its accounting information.

The financial object may include: at least one unit of interest in atleast one of: an asset; a liability; a tracking portfolio; a financialinstrument and/or a security, where the financial instrument and/or thesecurity denotes a debt, an equity interest, and/or a hybrid; aderivatives contract, including at least one of: a future, a forward, aput, a call, an option, a swap, and/or any other transaction relating toa fluctuation of an underlying asset, notwithstanding the prevailingvalue of the contract, and notwithstanding whether such contract, forpurposes of accounting, is considered an asset or liability; a fund;and/or an investment entity of any kind, including an interest in, orrights relating to: a hedge fund, an exchange traded fund (ETF), a fundof funds, a mutual fund, an investment vehicle, and/or any other pooledand/or separately managed investments.

The measure of company size may include at least one of: a financialratio of a company; a ratio of accounting based data; a ratio ofaccounting based data per share; a ratio of a first accounting baseddata to a second accounting based data; a liquidity ratio; a workingcapital ratio; a current ratio; a quick ratio; a cash ratio; an assetturnover ratio; a receivables turnover ratio; an average collectionperiod ratio; an average collection period ratio; an inventory turnoverratio; an inventory period ratio; a leverage ratio; a debt ratio; adebt-to-equity ratio; an interest coverage ratio; a profitability ratio;a return on common equity (ROCE) ratio; profit margin ratio; an earningsper share (EPS) ratio; a gross profit margin ratio; a return on assetsratio; a return on equity ratio; a dividend policy ratio; a dividendyield ratio; a payout ratio; a capital market analysis ratio; a price toearnings (PE) ratio; and/or a market to book ratio.

Further features and advantages of the invention, as well as thestructure and operation of various embodiments of the invention, aredescribed in detail below with reference to the accompanying drawings.

BRIEF DESCRIPTION OF THE DRAWINGS

The foregoing and other features and advantages of the invention will beapparent from the following, more particular description of exemplaryembodiments of the invention, as illustrated in the accompanyingdrawings. In the drawings, like reference numbers generally indicateidentical, functionally similar, and/or structurally similar elements.The drawing in which an element first appears is indicated by theleftmost digits in the corresponding reference number. A preferredexemplary embodiment is discussed below in the detailed description ofthe following drawings:

FIG. 1 is a deployment diagram of an index generation and use process inaccordance with an exemplary embodiment of the present invention;

FIG. 2 is a process flow diagram of an index generation process inaccordance with an exemplary embodiment of the present invention;

FIG. 3 is a process flow diagram of an index use process in accordancewith an exemplary embodiment of the present invention;

FIG. 4 is a process flow diagram of a method of creating a portfolio offinancial objects; and

FIG. 5 is a process flow diagram of a method of constructing an ADBI anda portfolio of financial objects using the ADBI.

DETAILED DESCRIPTION OF EMBODIMENTS OF THE PRESENT INVENTION

Various exemplary embodiments of the invention are discussed in detailbelow including a preferred embodiment. While specific implementationsare discussed, it should be understood that this is done forillustration purposes only. A person skilled in the relevant art canrecognize that other components, configurations, accounting data, andratios may be used without parting from the spirit and scope of theinvention.

An exemplary embodiment of the invention may be implemented on acomputing device(s), processor(s), computer(s) and/or communicationsdevice(s).

The computer, in an exemplary embodiment, may comprise one or morecentral processing units (CPUs) or processors, which may be coupled to abus. The processor may, e.g., access main memory via the bus. Thecomputer may be coupled to an input/output (I/O) subsystem such as,e.g., but not limited to, a network interface card (NIC), or a modem foraccess to a network. The computer may also be coupled to a secondarymemory directly via bus, or via a main memory, for example. Secondarymemory may include, e.g., but not limited to, a disk storage unit orother storage medium. Exemplary disk storage units may include, but arenot limited to, a magnetic storage device such as, e.g., a hard disk, anoptical storage device such as, e.g., a write once read many (WORM)drive, or a compact disc (CD), or a magneto optical device. Another typeof secondary memory may include a removable disk storage device, whichmay be used in conjunction with a removable storage medium, such as,e.g. a CD-ROM, a floppy diskette or flash drive, etc. In general, thedisk storage unit may store an application program for operating thecomputer system referred to commonly as an operating system. The diskstorage unit may also store documents of a database (not shown). Thecomputer may interact with the I/O subsystems and disk storage unit viabus. The bus may also be coupled to a display for output, and inputdevices such as, but not limited to, a keyboard and a mouse or otherpointing/selection device.

In this document, the terms “computer program medium” and “computerreadable medium” may be used to generally refer to media such as, e.g.,but not limited to, a removable storage drive, a hard disk installed inhard disk drive, and signals, etc. These computer program products mayprovide software to the computer system. The invention may be directedto such computer program products.

References to “one embodiment,” “an embodiment,” “example embodiment,”“various embodiments,” etc., may indicate that the embodiment(s) of theinvention so described may include a particular feature, structure, orcharacteristic, but not every embodiment necessarily includes theparticular feature, structure, or characteristic. Further, repeated useof the phrase “in one embodiment,” or “in an exemplary embodiment,” donot necessarily refer to the same embodiment, although they may.

In the following description and claims, the terms “coupled” and“connected,” along with their derivatives, may be used. It should beunderstood that these terms are not intended as synonyms for each other.Rather, in particular embodiments, “connected” may be used to indicatethat two or more elements are in direct physical or electrical contactwith each other. “Coupled” may mean that two or more elements are indirect physical or electrical contact. However, “coupled” may also meanthat two or more elements are not in direct contact with each other, butyet still co-operate or interact with each other.

An algorithm is here, and generally, considered to be a self-consistentsequence of acts or operations leading to a desired result. Theseinclude physical manipulations of physical quantities. Usually, thoughnot necessarily, these quantities take the form of electrical ormagnetic signals capable of being stored, transferred, combined,compared, and otherwise manipulated. It has proven convenient at times,principally for reasons of common usage, to refer to these signals asbits, values, elements, symbols, characters, terms, numbers or the like.It should be understood, however, that all of these and similar termsare to be associated with the appropriate physical quantities and aremerely convenient labels applied to these quantities.

Unless specifically stated otherwise, as apparent from the followingdiscussions, it is appreciated that throughout the specificationdiscussions utilizing terms such as “processing,” “computing,”“calculating,” “determining,” or the like, refer to the action and/orprocesses of a computer or computing system, or similar electroniccomputing device, that manipulate and/or transform data represented asphysical, such as electronic, quantities within the computing system'sregisters and/or memories into other data similarly represented asphysical quantities within the computing system's memories, registers orother such information storage, transmission or display devices.

In a similar manner, the term “processor” may refer to any device orportion of a device that processes electronic data from registers and/ormemory to transform that electronic data into other electronic data thatmay be stored in registers and/or memory. A “computing platform” maycomprise one or more processors.

Embodiments of the present invention may include apparatuses forperforming the operations herein. An apparatus may be speciallyconstructed for the desired purposes, or it may comprise a generalpurpose device selectively activated or reconfigured by a program storedin the device.

Constructing Accounting Data Based Indexes

A financial object, as discussed herein, may include at least one unitof interest in an asset; a liability; a tracking portfolio; and/or afinancial instrument and/or a security, where the financial instrumentand/or security denotes a debt, an equity interest, and/or a hybrid. Afinancial object, as discussed herein, may also include at least oneunit of interest in a derivatives contract, including but not limited toat least one of: a future, a forward, a put, a call, an option, a swap,or other financial instrument whose price is derived from the price ofthe underlying financial asset, and/or any other transaction relating toa fluctuation of an underlying asset, notwithstanding the prevailingvalue of the contract, and notwithstanding whether such contract, forpurposes of accounting, is considered an asset or liability. A financialobject, as discussed herein, may also include at least one unit ofinterest in a fund; and/or in an investment entity or account of anykind, including an interest in, or rights relating to: a hedge fund, anexchange traded fund (ETF), a fund of funds, a mutual fund, a closed endfund, an investment vehicle, and/or any other pooled and/or separatelymanaged investments.

FIG. 1 depicts an exemplary deployment diagram 100 of an indexgeneration and use process in accordance with an exemplary embodiment ofthe present invention. According to the exemplary embodiment, an analystmay use a computer system 102 to generate an index 110. The analyst maydo so by using analysis software 114 to examine data 106 about entitiesoffering different kinds of financial objects that may be traded byinvestors. An example of an entity that may be offering financialobjects may be a publicly held company whose shares trade on anexchange. However, the present invention also applies to any entity thatmay have any type of financial object that may be traded whereinformation about the entity and/or its financial objects is available(or capable of being made available) for analysis.

In an exemplary embodiment, once index 110 has been generated by ananalyst using the entity data 106, index 110 may be used to buildinvestment portfolios. An investor, advisor, manager or broker may thenmanage the purchased financial objects as a mutual fund, an electronictraded fund, a hedge fund or other portfolio or account of assets forone or for a plurality of individual and/or institutional investors. Theinvestor, advisor, manager or broker may use a trading computer 104 withtrading software 116 to manage one or more trading accounts 108.Alternatively, the purchased financial objects may be managed for one ormore investors. In the latter case, financial objects may be purchasedbased on the index for inclusion in an individual or an institutionalinvestor's portfolio. One or more trades may be effected or closed incooperation with and via communication with an exchange host 112.

FIG. 2 depicts an exemplary process flow diagram 200 of an indexgeneration process in accordance with an exemplary embodiment of thepresent invention. In an exemplary embodiment, starting at block 202, togenerate index 110, an analyst using analysis software 114 may accessentity data 106 about various entities that have financial objects thatare traded. For example, publicly traded companies must discloseinformation about certain financial aspects of their operations. Thisinformation may be aggregated for a plurality of entities. Marketsectors and corresponding indices may then be identified and generatedusing the aggregate data.

In slightly more detail, an index 110 may be generated by normalizingentity data for a particular non-market capitalization metric in block204. The normalized entity data may be used to generate a weightingfunction, in block 206, describing the contribution of each entity to abusiness sector as defined by the metric, in an exemplary embodiment.Index 110 may be generated using the weighting function in block 208.The process ends at block 210. Once index 110 is generated, according toan exemplary embodiment, index 110 may be used to track the businesssector defined by the metric or to create a portfolio of financialobjects offered by the entities whose information was used to generatethe index.

For example, in an exemplary embodiment of the invention a method ofconstructing a non-capitalization weighted portfolio of financialobjects may include, e.g., gathering data about various financialobjects; selecting a group of financial objects to create the index offinancial objects; and weighting each of the group of financial objectsselected in the index based on an objective measure of scale of eachmember of the group of financial objects, where the weighting mayinclude weighting all or a subset of the group of financial objects, andweighting based on other than market capitalization, equal weighting, orshare price weighting.

In one exemplary embodiment, the weighting of each member of the groupof financial objects, may include weighting financial objects of any ofvarious types. Examples of various types of financial objects mayinclude, e.g., but not limited to, a stock type; a commodity type; afutures contract type; a bond type; a mutual fund type; a hedge fundtype; a fund of funds type; an exchange traded fund (ETF) type; aderivative type asset, and any other portfolio or account of financialobjects. The weighting may also include, e.g., but not limited to, anegative weighting on any of the various types of financial objects.

According to exemplary embodiments of the present invention, the index110 may be weighted based on an objective measure of scale, where theobjective measure of scale may include a measure relating to anunderlying asset itself. The financial object may include amunicipality, a municipality issuing bonds, or a commodity. An objectivemeasure of scale associated with the financial object may include anycombination or ratios of: revenue, profitability, sales, total sales,foreign sales, domestic sales, net sales, gross sales, profit margin,operating margin, retained earnings, earnings per share, book value,book value adjusted for inflation, book value adjusted for replacementcost, book value adjusted for liquidation value, dividends, assets,tangible assets, intangible assets, fixed assets, property, plant,equipment, goodwill, replacement value of assets, liquidation value ofassets, liabilities, long term liabilities, short term liabilities, networth, research and development expense, accounts receivable, earningsbefore interest, taxes, dividends, and amortization (EBITDA), accountspayable, cost of goods sold (CGS), debt ratio, budget, capital budget,cash budget, direct labor budget, factory overhead budget, operatingbudget, sales budget, inventory method, type of stock offered,liquidity, book income, tax income, capitalization of earnings,capitalization of goodwill, capitalization of interest, capitalizationof revenue, capital spending, cash, compensation, employee turnover,overhead costs, credit rating, growth rate, dividends, dividends pershare, dividend yields, tax rate, liquidation value of company,capitalization of cash, capitalization of earnings, capitalization ofrevenue, cash flow, and/or future value of expected cash flow.

Ratios too may be used. In an exemplary embodiment, the weighting offinancial objects in the index based on objective measures of scale mayinclude a ratio of any combination of the objective measures of scale ofthe financial object other than ratios based on weighting the financialobjects based on market capitalization, equal weighting, or share priceweighting. For example, the ratio of any combination of the objectivemeasures of scale may include, e.g., but not limited to, current ratio,debt ratio, overhead expense as a percent of sales, or debt serviceburden ratio.

In an exemplary embodiment, the portfolio of financial objects mayinclude, e.g., but not limited to, one or more of, a fund; a mutualfund; a fund of funds; an asset account; an exchange traded fund (ETF);a separate account, a pooled trust; a limited partnership or other legalentity, fund or account.

In an exemplary embodiment, a measure of company size may include oneof, or a combination of one or more of, gross revenue, sales, income,earnings before interest and tax (EBIT), earnings before interest,taxes, depreciation and amortization (EBITDA), number of employees, bookvalue, assets, liabilities, net worth, cash flow or dividends.

In one exemplary embodiment, the measure of company size may include ademographic measure of the financial object. The demographic measure ofthe financial object may include, e.g., one of, or any combination ofone or more of a non-financial metric, a non-market related metric, anumber of employees, floor space, office space, or other demographics ofthe financial object.

In an exemplary embodiment, weighting may be based on the objectivemeasure of scale, where the measure may include a geographic metric. Thegeographic metric in an exemplary embodiment may include a geographicmetric other than gross domestic product (GDP) weighting.

FIG. 3 depicts an exemplary process flow diagram 300 of an index useprocess in accordance with an exemplary embodiment of the presentinvention. The process starts at block 302. An index 310 may be receivedfrom an index generation process and may be used to determine theidentity and quantity of securities to purchase for a portfolio in block304, according to an exemplary embodiment. The securities may bepurchased, in block 306, from an exchange 314 or other market and may beheld on account for an investor or group of investors in tradingaccounts 308. The index 310 may be updated on, e.g., but not limited to,a periodic basis and may be used as a basis to rebalance the portfolio,according to an exemplary embodiment. According to another exemplaryembodiment, the portfolio can be rebalanced when, e.g., a pre-determinedthreshold is reached. In this way, a portfolio may be created andmaintained based on a non-market capitalization index.

Rebalancing can be based on financial objects reaching a thresholdcondition or value. For example, but not limited to, rebalancing mayoccur upon reaching a threshold such as, e.g., ‘when the portfolio offinancial objects increases in market value by 20%,’ or ‘when thefinancial objects on a sub-category within the portfolio exceed 32% ofthe size of the portfolio,’ or ‘when a U.S. President is elected from adifferent party than the incumbent,’ etc. Rebalancing may take placeperiodically, e.g., quarterly, or annually.

The present invention, in an exemplary embodiment, may be used forinvestment management, or investment portfolio benchmarking.

Another exemplary embodiment of the present invention may include anAccounting Data Based Index (ADBI) such as, e.g., but not limited to, aFUNDAMENTAL INDEX™ and Index Fund or Funds.

This exemplary embodiment may utilize a new series of accounting databased stock market indices in which the index weightings may bedetermined by company accounting data such as, e.g., but not limited to,the relative size of a company's profits, or its pre-exceptionalprofits, or sales, or return on investment or any accounting data basedaccounting item, or ratio, may help to address some of the issues raisedabove. An index that is weighted based on company accounting data,rather than the share price, or market capitalization or equalweighting, may have a stabilizing element within it that can help toremove excess volatility generated by indices constructed on the basisof price or market capitalization alone. Over the medium to longer term,such accounting data based indices have the potential to outperformprice or market capitalization-based indices, and may do so with lessvolatility.

The exemplary inventive method may create a new class of stock marketindices and index funds that may be implemented on, e.g., but notlimited to, a computing device or a processor, or as a computer softwareor hardware, or as an algorithm. This new class of stock market indicesmay base its weightings on the accounting data of the companies thatmake up that index. One possible version of an accounting data basedstock market index may be an index that is based on the relative size ofa sample of the companies' pre-exceptional profits. If the chosen sampleof companies was determined to be one hundred and the accounting databased criteria that the index manager decided to use was to be ‘largestpre-exceptional profits,’ then the index may contain, e.g., the onehundred largest companies as defined by the size of theirpre-exceptional profits. As an example, if the total pre-exceptionalprofits of the largest one hundred companies, as measured by theirpre-exceptional profits, was 100 dollars, pound, or other currency, in adefined time period (such as a quarter or year) and in the same timeperiod the pre-exceptional profits of theoretical company ‘A’ were $2,then theoretical company A would be allocated a 2% weighting in theaccounting data based index, in an exemplary embodiment. If theoreticalcompany B had pre-exceptional profits of $1.5 in over the same timeperiod then it would have a weighting of 1.5% in the accounting databased index according to an exemplary embodiment.

The index weightings may be managed based on how the fundamentals of thecompanies within, or outside, the chosen index sample may change. As anexample, the index manager could choose to rebalance the weightings fromtime to time such as, e.g., but not limited to, periodically,aperiodically, quarterly, as company pre-exceptional profits change,and/or on an annual basis, etc., and enter their choice into, e.g., acomputing device. If, for instance, by the time of the next rebalancingperiod the total pre-exceptional profits of the largest one hundredcompanies, as measured by their pre-exceptional profits, had grown to$120, and theoretical company A now had pre-exceptional profits of $1.2,the computing device may calculate the weighting of company in theaccounting data based index such as, e.g., the accounting data basedindex down to 1% from 2% in the previous period. Creating suchaccounting data based indices may give an investor the opportunity tofollow, or invest, passively in an index which may be anchored to theeconomic realities of the companies within it. This new accounting databased index construction technique by a computing device may produce anindex and related index fund products with increased stability and withincreased economically rational behavior as compared with known methodsof investing.

Accounting Data Based Indexation

In one exemplary embodiment, a computing device may create an accountingdata based stock market index (ADBI) such as, e.g., an accounting databased stock market index by using any of the accounting data based datapoints regarding a company or a group of companies that can be found ina company's annual report and accounts. In one exemplary embodiment, thecomputing device may create an index of companies based on the relativesize of the companies' sales, assets, profits, cash flow or theshareholders equity. In addition, the computing device can also createthe ADBI by using a ratio of any of the data concerning a company orgroup of companies that may be contained in a company report andaccounts. In one exemplary embodiment, this could include the relativesize of the return on financial objects of a selection of companies,their return on investment, or their return on capital compared to theircost of capital.

Once the index manager has decided and entered which accounting databased criteria to use and how many constituents the manager may decidethat he or she wants to include in the index, the computing device maycreate the index in the following way. If, for example, the indexmanager decides to construct an accounting data based stock market indexof one hundred constituent members and decides to use pre-exceptionalprofit as the chosen accounting data based criteria, the computingdevice may create the index as follows. First, the computing device mayperform a search to find which are the largest one hundred listedcompanies as defined by the size of their pre-exceptional profits. Oncethe computing device has identified this information, the computingdevice may be ready to construct the index. Companies may be accordedindex weightings based on the relative size of their pre-exceptionalprofits. If the combined pre-exceptional profits of the one hundredcompanies is $100 and theoretical company A has pre-exceptional profitsof $2, then it may have an index weighting of 2%. Once the one hundredcompanies may have been accorded their weightings, the computing devicemay begin to calculate future index performance as the share prices ofthe different companies in the index changes from day to day. This maybe achieved by assuming a starting value for the index, or indexportfolio, and then calculating how each of the index constituents mayperform going forward.

The computing device may then rebalance the index weightings as theaccounting data based data points change over time as desired by theinvestor. For instance, if at the end of the next company reportingseason the combined pre-exceptional profits of the one hundred largestcompanies had grown from $100 to $120 and the pre-exceptional profits oftheoretical company A had declined from $2 to $1.2, the computing devicemay determine its weighting in the index would decline from 2% in theprior period to 1% in the current period. Also, some of the originalcompanies in the first one hundred may be eliminated from the index iftheir pre-exceptional profits fall below a certain level while newcompanies that were not in the original sample may be included. Thecomputing device, under the direction of an investor, may choose torebalance the weightings in the index, e.g., but not limited to, asindividual companies report their pre-exceptional profits on a quarterlybasis, and/or waiting until the majority of companies have reportedtheir pre-exceptional profits and then adjusting them all at once. Also,the computing device, under the direction of an investor, could chooseto determine the weightings based on, e.g., but not limited to, eitherthe total nominal amount of pre-exceptional profit each quarter or on acumulative rolling basis.

Constructing a stock market index according to an exemplary embodimentusing accounting data based company accounts data or a ratio, ormanipulation of that data may provide a series of genuine alternativesfor investors who want to invest in a passive style while focusing onfundamentals that they believe are important. For instance, according toan exemplary embodiment an investor may always want to own an index ofU.S. or foreign equities that are, e.g., the largest five hundredcompanies as measured by sales, or by profits, or by growth in sales, orby return on investment, or any accounting data based company accountsdata or ratio of that data.

Long-Short Equity Strategies

An exemplary embodiment of the present invention may take long and shortpositions based on an extent to which accounting data based indexationsuggests that equities are under or over valued.

FIG. 4 illustrates an exemplary process flow diagram 400 of a method ofcreating a portfolio of financial objects according to an embodiment ofthe present invention. In block 402 the process starts. In block 404, adetermination is made of overlapping financial objects that appear inboth an accounting data based index (ADBI) 410 and a conventionalweighted index 412. In block 406, the weightings of the overlappingfinancial objects in the ADBI are compared with the weightings of theoverlapping financial objects in the conventionally weighted index.Then, in block 408, one or more of the overlapping financial object maybe purchased based on the result of the comparison.

In the alternative, exemplary embodiments of the present invention maydetermine non-overlapping financial objects appearing in only one ofeither an accounting data based index (ADBI) or a conventional weightedindex by comparing financial objects in an ADBI with financial objectsin a conventionally weighted index. Non-overlapping financial objectsappearing only in the ADBI may be weighted by accounting data basedweighting. Non-overlapping financial objects appearing only in theconventionally weighted index may be weighted by the conventionalweighting. Financial objects may then be purchased based on theresulting weightings.

In an exemplary embodiment, an index of the largest 1,000 U.S. equities,weighted by accounting data, may overlap an index of the largest 1,000U.S. capitalization-weighted companies by approximately 80%. The 20% ofnon-overlapping companies may drive the 2.0% increase in return of anaccounting data based index such as, e.g., but not limited to, RESEARCHAFFILIATES FUNDAMENTAL INDEX™ (RAFI™) available from ResearchAffiliates, LLC of Pasadena, Calif., versus a cap-weighted index. Along-short strategy according to an exemplary embodiment is designed toleverage this 20% of companies that do not overlap, and may capture theexpected alpha from the accounting data based indexation. An exemplarylong-short U.S. equity strategy may be approximately beta and dollarneutral and can replace or complement market neutral or long-shortstrategies, or as part of a portfolio's alternative strategies bucket.

Accounting data based indexation may use economic measures of companysize in constructing indexes. Using accounting data based economicmeasures of firm size may create an index that is indifferent to price.Accounting data based indexes may avoid flaws inherent in capitalization(price)-weighted indexes. Capitalization-weighted indexes naturallyoverweight overvalued stocks and underweight undervalued stocks.Accounting data based indexes may more accurately estimate a true fairvalue of a company, allowing the weight of a company's stock in theindex to rise or fall only to the extent that the underlying economicvalue of the issuing company may rise or fall.

ADBI Portfolio Construction

FIG. 5 illustrates an exemplary flow process diagram 500 of a method ofconstructing an ADBI and a portfolio of financial objects using theADBI, starting at block 502. In block 504, the ADBI 510 is created.Creating the ADBI may include, in block 506, selecting a universe offinancial objects, and, in block 508, selecting a subset of the universebased on the accounting data to obtain the ADBI 510. Then, in block 512,a portfolio of financial objects is created using the ADBI 510,including weighting the financial objects in the portfolio according toa measure of value of a company associated with each financial object inthe portfolio.

To construct an exemplary accounting data based index (ADBI), such as,e.g., but not limited to, the RESEARCH AFFILIATES FUNDAMENTAL INDEX™(RAFI™), some number of financial objects, e.g., 1000 US equities, maybe selected and/or weighted based on the following four accounting databased measures of firm size: book equity value, free cash flow, sales,and gross dividends.

An exemplary embodiment of an accounting data based index such as, e.g.,but not limited to, the RAFI™ index may first weight all US equities byeach of the four accounting data based measures of firm size detailedabove. According to an exemplary embodiment, an optimal relativeweighting between the four factors may differ by geography of the stockmarket from which the equities are selected such as, e.g., an equalweighting may be optimal in one country or industry sector, while adifferent relative weighting between the factors may make sense inanother country or industry sector. The index may then compute anoverall weight for each holding by equally-weighting each of the fouraccounting data based measure of firm size according to an exemplaryembodiment. For example, assume that a company has the followingweights: 2.8% of total US book values, 2% of total US cash flow, 3% oftotal US sales, and 2.2% of total US dividends.

Equally-weighting these four accounting data based measures of firm size(i.e., book value, cashflow, sales and dividends) may produce a weightof 2.5%. According to an exemplary embodiment, for companies that havenever paid dividends, one may exclude dividends from the calculation ofthe company's accounting data based weight. Finally, in an exemplaryembodiment, the 1000 equities with the highest accounting data basedweights may be selected and may be assigned a weight in the RAFI™portfolio equal to its accounting data based weight.

According to another exemplary embodiment, an accounting data basedindex such as, e.g., but not limited to, RAFI™ maybe constructed usingaggregate (not per-share) measures of firm size. For example, RAFI™ mayuse total firm cash flow instead of cash flow per share and total bookvalue instead of book value per share in its construction.

In an exemplary embodiment, the accounting data may include thefollowing four factors, book value, sales/revenue, cash flow anddividends. In another exemplary embodiment, only one or more of thesefactors may be used. In another exemplary embodiment, additional factorsmay be used, such as, e.g., any other accounting data. In one exemplaryembodiment, the weightings of each of these factors may be equalrelative to one another, i.e., 25% of each of book value, sales/revenue,cash flow and dividends. In one exemplary embodiment, if there are nodividends, then the other three factors may be weighted in equal parts,i.e., 33% each to book value, sales/revenue, and cash flow. In anotherexemplary embodiment, dividends may be weighted in a greater part suchas, e.g., but not limited to, weighting dividends at 50% and book value,sales/revenue, and cash flow at ⅙th each, etc. In one exemplaryembodiment, weightings may be the same, depending on the country orsovereign of origin or the industry sector of the stock or otherfinancial object. In another exemplary embodiment, weightings may varydepending on the country or sovereign of origin or the industry sectorof the stock or other financial object. In another exemplary embodiment,weightings may vary based on other factors, such as, e.g., but notlimited to, types of assets, industry sectors, geographic sectors, sizesof companies, profitability of companies, amount of revenue generated bythe company, etc.

An accounting data based index may be available in several varieties tomeet the unique needs of different classes of retail and institutionalinvestors, including, e.g., but not limited to, as enhanced portfolios,Exchange Traded Funds (ETFs), open-end mutual funds, tax managedportfolios, a collection of financial objects managed collectively buttracked separately, and closed-end mutual funds. Various US andinternational investment managers may offer, e.g., but not limited to, asuite of products.

A limited partnership or other fund or account investing in assets basedon an Accounting Data Based Index, such as, e.g., Research AffiliatesFundamental Index, L.P. (RAFI LP) may increase the alpha generated byaccounting data based indexation in the US through improvements orenhancements, including, e.g., but not limited to, monthly cashrebalancing and quality of earnings and corporate governance screens.The additional enhancements available through the LP may be expected toadd an additional 40-70 bps of annual outperformance above the 200 basispoints (bps) of annual out performance that may be achieved through theuse of accounting data based indexing in portfolio construction.

A limited partnership or other fund or account investing in assets basedon an ADBI international LP such as, RAFI International LP (RAFI™-I mayapply accounting data based indexation to the international equity spacein an exemplary embodiment to create an enhanced portfolio of, e.g., butnot limited to 1000 international (ex-US) equities. RAFI-I may beexpected to outperform capitalization weighted indexes by approximately250 bps per year. Like the other RA Fundamental Index LP's, RAFI-I is anenhanced portfolio that may use monthly cash rebalancing and quality ofearnings and corporate governance screens to improve upon theperformance of the RAFI International index.

Open-end mutual funds may manage financial objects employing a fixedincome strategy and portable alpha using the Accounting Data Based Index(ADBI) according to an exemplary embodiment.

An Exchange Traded Fund (ETF) of the ADBI such as, e.g., but limited to,POWERSHARES FTSE RAFI US 1000 Portfolio ETF (ticker symbol: PRF) maymeet needs of retail and institutional investors interested in alow-cost means of accessing the power of accounting data based indexingin another exemplary embodiment.

Another exemplary embodiment includes a closed-end fund implementingaccounting data based indexing such as, e.g., Canadian FundamentalIncome 100, a closed-end mutual fund of the largest 100 accounting databased equities in Canada which attracted investments from retail andinstitutional investors in 2005, one of the most difficult closed endmarkets in recent history, demonstrating the strength of the accountingdata based indexation strategy.

Accounting Data Based Indexation Long-Short (ADBI-LS)

Accounting data based indexation long-short (ADBI-LS) such as, e.g., butnot limited to, RAFI-LS, is a long-short U.S. equity strategy thatleverages ADBI such as RAFI™ innovation. The RAFI U.S. 1000 portfolio isdesigned to outperform the Russell 1000 (and the S&P 500) by about 200bps per annum. By going long in stocks that have greater weight in theRAFI U.S. 1000 portfolio relative to the Russell 1000 and short in thestocks that are underweight in the RAFI U.S. 1000 relative to theRussell 1000, the RAFI-LS strategy captures the RAFI alpha process andenhances that alpha source.

ADBI-LS such as, e.g., RAFI-LS according to an exemplary embodiment, isdesigned to be roughly dollar and beta neutral, but not sector neutral.The sector bet can be significant if the ADBI strategy determines that asector is substantially overvalued.

In general the overlap between ADBI RAFI U.S. 1000 and capitalizationbased index Russell 1000 may be about 75%. This may give 25% weights forthe long portfolio and 25% weights for the short portfolio. Theportfolio may be applied to 300% long and 300% short, which may magnifythe RAFI alpha and the portfolio volatility. Leverage may be appliedtactically, and can range from about 200% long/short to about 400%long/short according to exemplary embodiments.

ADBI-LS such as, e.g., RAFI-LS according to an exemplary embodiment maybe designed to achieve an annual volatility of 15-25%. Volatility of theexemplary RAFI-LS, since inception, has been about 15%.

According to an exemplary embodiment, ADBI-LS, such as, e.g., RAFI-LSmay use leverage in both its short and long positions. On average, $100invested in RAFI-LS may result in a $300 notional long position and a$300 notional short position.

Implementation of an ADBI-LS's Long and Short Positions

According to an exemplary embodiment, one does not necessarily directlyneed to hold long or short positions in the underlying stocks, nor doesit need to access a direct line of credit for the portfolio leverage.Instead, according to an exemplary embodiment, derivatives, such as atotal return swaps may be used to implement the long and shortpositions. It may be possible to achieve minimal counterparty defaultrisk exposure by entering into swaps with large Wall Street firms in anexemplary embodiment. Investors in an ADBI-LS may not be physicallyshorting any U.S. equities; rather, investors may merely hold OTCderivative contracts. This may provide both tax benefits and efficiencyin investment logistics.

ADBI-LP such as, e.g., RAFI-LP™, may be a full-market ADBI. ADBI-LS suchas, e.g., RAFI-LS™, may be a fund that uses the differences betweencompany weights in ADBI such as, e.g., RAFI™ and in acapitalization-weighted index to establish long and short positionsaccording to an exemplary embodiment.

ADBI-LS may be designed to be dollar neutral and equity beta neutral inan exemplary embodiment. Therefore, one may expect ADBI-LS returns to belargely uncorrelated with the equity market return in an exemplaryembodiment. However, ADBI may not be market neutral in the traditionalsense as it is not industry sector neutral in an exemplary embodiment.

ADBI-LS does not pair positions, and thus is different from traditionalequity long-short strategies whereby e.g., but not limited to, a shortGeneral Motors (GM) position is paired with a long Ford position.Instead, ADBI-LS may acquire both long and short positions based on therelative difference between the ADB Index such as, e.g., FUNDAMENTALINDEX™ weights and those of a cap-weighted index, such as, e.g., but notlimited to the Russell 1000.

An exemplary embodiment of ADBI-LS may rebalance periodically and/oraperiodically. For example, on average, the ADBI-LS, such as, e.g.,RAFI-LS portfolio may hold its long-short bets for about one year. Thecash flow from new capital contributed to the strategy may be used torebalance the portfolio to create new or alter existing long-short betsaccording to an exemplary embodiment.

In an exemplary embodiment, the present invention may be a method ofconstructing a portfolio of financial objects, comprising: purchasing aportfolio of a plurality of mimicking financial objects to obtain and/orcreate a mimicking portfolio, wherein performance of the portfolio ofmimicking financial objects substantially mirrors the performance of theaccounting data based index based portfolio without substantiallyreplicating the accounting data based index based portfolio. The methodmay further obtain and/or use a risk model for the portfolio where therisk model mirrors a risk model of the accounting data based index. Therisk model may be substantially similar to the Fama-French factors,wherein the Fama-French factors may comprise at least one of size effect(e.g., where small cap beats large cap), value effect (e.g., where highB/P beats low B/P), and/or momentum effect (e.g. where strong momentumbeats weak momentum in very long run, e.g. 10 or more years). Theperformance of the portfolio of mimicking financial objects maysubstantially mirror the performance of the accounting data based indexbased portfolio without substantially replicating financial objectsand/or weightings in the accounting data based index based portfolio.

In another exemplary embodiment, the present invention may includepurchasing a plurality of financial objects according to weightingssubstantially similar to the weightings of an accounting data basedindex (ADBI), where performance of the financial objects substantiallymirrors the performance of the ADBI without using substantially the samefinancial objects in the ADBI.

While various embodiments of the present invention have been describedabove, it should be understood that they have been presented by way ofexample only, and not limitation. Thus, the breadth and scope of thepresent invention should not be limited by any of the above-describedexemplary embodiments, but should instead be defined only in accordancewith the following claims and their equivalents.

1-27. (canceled)
 28. A method, executed by at least one processor of atleast one data processing system, comprising: creating, by the at leastone processor, an accounting data based index (ADBI) based on at leastone accounting data comprising: selecting, by the at least one processorbased on user input, a universe of financial objects, selecting, by theat least one processor based on user input, a subset of said universebased on said at least one accounting data to obtain said ADBI; andweighting, by the at least one processor based on user input, thefinancial objects in said ADBI according to a measure of scale of anentity associated with each financial object in said ADBI; and creating,by the at least one processor, a portfolio of financial objects based onsaid ADBI.
 29. The method according to claim 28, wherein said universecomprises at least one of: publicly traded stocks; a sector; a market; amarket sector; a growth market sector; a value market sector; anindustry sector; a geographic sector; an international sector; asub-industry sector; a government issue; a measure of value; aprice-based ratio sector; a size of an entity; a market size of anentity; any measure of size of an entity; a size of a company; or a taxexempt financial object.
 30. The method according to claim 28, whereinsaid accounting based data used in weighting as said measure of scale ofthe entity associated with the financial object, comprises at least oneof: any dividends; sales; cash flow; or book value.
 31. The methodaccording to claim 30, wherein said accounting based data are weightedrelatively dependent on the geography of the entity associated with saidfinancial object.
 32. The method of claim 28, wherein said financialobject comprises: at least one unit of interest in at least one of: anasset; a liability; a tracking portfolio; a financial instrument or asecurity, wherein said financial instrument or said security denotes atleast one of a debt, an equity interest, or a hybrid; a derivativescontract, including at least one of: a future, a forward, a put, a call,an option, a swap, or any other transaction relating to a fluctuation ofan underlying asset, notwithstanding the prevailing value of thecontract, and notwithstanding whether such contract, for purposes ofaccounting, is considered an asset or liability; a fund; or aninvestment entity or account of any kind, including an interest in, orrights relating to at least one of: a hedge fund, an exchange tradedfund (ETF), a fund of funds, a mutual fund, a closed end fund, aninvestment vehicle, or any other pooled or separately managedinvestments. 33-38. (canceled)
 39. The method of claim 28, wherein saidmeasure of said scale of the entity comprises a measure of company sizecomprising at least one of: a financial ratio of a company; a ratio ofaccounting based data; a ratio of accounting based data per share; aratio of a first accounting based data to a second accounting baseddata; a liquidity ratio; a working capital ratio; a current ratio; aquick ratio; a cash ratio; an asset turnover ratio; a receivablesturnover ratio; an average collection period ratio; an averagecollection period ratio; an inventory turnover ratio; an inventoryperiod ratio; a leverage ratio; a debt ratio; a debt-to-equity ratio; aninterest coverage ratio; a profitability ratio; a return on commonequity (ROCE) ratio; profit margin ratio; an earnings per share (EPS)ratio; a gross profit margin ratio; a return on assets ratio; a returnon equity ratio; a dividend policy ratio; a dividend yield ratio; or apayout ratio.
 40. (canceled)
 41. A method, executed by at least oneprocessor of at least one data processing system, comprising: creating,by the at least one processor based on user input, an accounting databased index (ADBI), based on at least one accounting data comprising:selecting, by the at least one processor based on user input, a universeof financial objects, selecting, by the at least one processor based onuser input, a subset of said financial objects of said universe,selecting, by the at least one processor based on user input, aplurality of said financial objects of said subset based upon at leastone accounting data to obtain constituent financial objects of saidADBI; and weighting, by the at least one processor based on user input,said plurality of said financial objects comprising said constituentfinancial objects of said ADBI based upon at least one measure of scaleof an entity associated with each said constituent financial object ofsaid ADBI.
 42. The method according to claim 41, wherein said selectingsaid subset comprises selecting, by the at least one processor based onuser input, said subset to avoid illiquid financial objects.
 43. Themethod according to claim 41, wherein said universe comprises at leastone of: all publicly traded stocks; a sector; a market; a market sector;a growth market sector; a value market sector; an industry sector; ageographic sector; an international sector; a sub-industry sector; aregional sector; a developed country sector; a developing countrysector; a government issue; a measure of value; a price-based ratiosector; a tax exempt financial object; a size of an entity; a marketsize of an entity; any measure of size of an entity; or a size of acompany.
 44. The method according to claim 41, wherein said selectingsaid subset comprises selecting, by the at least one processor based onuser input, a subset of said universe based upon at least one of: asector; a market; a market sector; a growth market sector; a valuemarket sector; an industry sector; a geographic sector; an internationalsector; a sub-industry sector; a regional sector; a developed countrysector; a developing country sector; a government issue; a measure ofvalue; a price-based ratio sector; a tax exempt financial object; a sizeof an entity; a market size of an entity; any measure of size of anentity; or a size of a company.
 45. The method according to claim 41,wherein the entity comprises at least one of: a company; a sovereignissuing said financial object; or an entity issuing said financialobject.
 46. The method according to claim 41, further comprising:creating, by the at least one processor based on user input, a portfolioof financial objects based on said ADBI.
 47. The method according toclaim 41, wherein said at least one accounting data comprises at leastone of: inventory of the entity; revenue of the entity; sales of theentity; income of the entity; book income of the entity; taxable incomeof the entity; earnings growth rate of the entity; earnings beforeinterest and tax (EBIT) of the entity; earnings before interest, taxes,depreciation, and amortization (EBITDA) of the entity; expected earningsof the entity; retained earnings of the entity; expected revenue of theentity; number of employees of the entity; capital expenditures of theentity; salaries of the entity; book value of the entity; assets of theentity; fixed assets of the entity; current assets of the entity;quality of assets of the entity; operating assets of the entity;intangible assets of the entity; dividends of the entity; grossdividends of the entity; dividend yields of the entity; expecteddividends of the entity; cash flow of the entity; expected cash flow ofthe entity; liabilities of the entity; losses of the entity; long termliabilities of the entity; short term liabilities of the entity;liquidity of the entity; long term debt of the entity; short term debtof the entity; bonds of the entity; corporate bonds of the entity; networth of the entity; shareholder equity of the entity; goodwill of theentity; research and development expenditures of the entity; costs ofthe entity; cost of goods sold (COGS) of the entity; or research anddevelopment costs of the entity.
 48. The method according to claim 41,wherein said at least one accounting data comprises at least one of: afinancial ratio of a company; a ratio of accounting based data; a ratioof accounting based data per share; a ratio of a first accounting baseddata to a second accounting based data; a liquidity ratio; a workingcapital ratio; a current ratio; a quick ratio; a cash ratio; an assetturnover ratio; a receivables turnover ratio; an average collectionperiod ratio; an average collection period ratio; an inventory turnoverratio; an inventory period ratio; a leverage ratio; a debt ratio; adebt-to-equity ratio; an interest coverage ratio; a profitability ratio;a return on common equity (ROCE) ratio; profit margin ratio; an earningsper share (EPS) ratio; a gross profit margin ratio; a return on assetsratio; a return on equity ratio; a dividend policy ratio; a dividendyield ratio; or a payout ratio.
 49. The method of claim 41, wherein saidfinancial object comprises: at least one unit of interest in at leastone of: an asset; a liability; a tracking portfolio; a financialinstrument or a security, wherein said financial instrument or saidsecurity denotes at least one of a debt, an equity interest, or ahybrid; a derivatives contract, including at least one of: a future, aforward, a put, a call, an option, a swap, or any other transactionrelating to a fluctuation of an underlying asset, notwithstanding theprevailing value of the contract, and notwithstanding whether suchcontract, for purposes of accounting, is considered an asset orliability; a fund; or an investment entity of any kind, including aninterest in, or rights relating to at least one of: a hedge fund, anexchange traded fund (ETF), a fund of funds, a mutual fund, aninvestment vehicle, or any other pooled or separately managedinvestments.
 50. The method according to claim 41, further comprising:selecting a subset of said universe of financial objects based on atleast one of: a liquidity of the financial objects, or a minimum size ofthe entity of said financial object.
 51. The method according to claim41, further comprising: managing, by the at least one processor based onuser input, a portfolio based on said ADBI.
 52. The method according toclaim 51, wherein said managing the portfolio comprises at least one of:purchasing, by the at least one processor based on user input, financialobjects according to said ADBI, comprising: purchasing financial objectsat least one of: in said ADBI, added to said ADBI, or having increasedin constituent weighting over time in said ADBI; and selling, by the atleast one processor based on user input, financial objects according tosaid ADBI, comprising: selling, by the at least one processor based onuser input, financial objects at least one of: not in said ADBI, removedfrom said ADBI, or having decreased in constituent weighting over timein said ADBI.
 53. The method according to claim 41, wherein saidselecting said subset comprises selecting, by the at least one processorbased on user input, said subset based on any measure of company size.54. The method according to claim 53, wherein said selecting said subsetcomprises selecting, by the at least one processor based on user input,said subset based on a minimum measure of company size.
 55. The methodaccording to claim 41, wherein said selecting said universe comprisesselecting a universe based on any measure of said company size.
 56. Themethod according to claim 54, wherein said selecting said subsetcomprises selecting, by the at least one processor based on user input,said subset based upon a minimum measure of said company size.
 57. Themethod according to claim 41, wherein at least one of said selectingsaid universe or said selecting said subset, comprises: selecting, bythe at least one processor based on user input, based upon a measure ofcompany size comprising at least one of: a large cap, a mid cap, or asmall cap.
 58. The method according to, claim 41, further comprising:selecting, by the at least one processor based on user input, a subsetof said ADBI based on a measure of scale of entities in said ADBI. 59.The method according to claim 41, further comprising: dividing, by theat least one processor based on user input, said ADBI into at least onepartition of said ADBI based upon at least one measure of scale ofentities of the financial objects in said ADBI.
 60. The method accordingto claim 41, further comprising: selecting, by the at least oneprocessor based on user input, at least a portion of said ADBI basedupon any measure of scale of entities of the financial objects in saidADBI.
 61. The method according to claim 41, wherein said universecomprises publicly traded stocks of all companies in a given country'sstock market.
 62. A computer-implemented method of constructing aportfolio based on an accounting data based index (ADBI) of financialobjects, the method comprising: a) receiving, by at least one processorbased on user input, the ADBI from an index provider, wherein the indexprovider previously constructed the ADBI and stored the ADBI on at leastone analysis host processor, the at least one analysis host processor ofthe index provider comprising at least one processor, at least one ofthe at least one processors adapted to access by the at least oneanalysis host processor of one or more databases storing and permittingretrieval of data (D) about a plurality of entities (E) and a pluralityof corresponding financial objects each issued by or having been issuedby at least one of the plurality of entities (E); at least one of the atleast one processors adapted to receive by the at least one analysishost processor at least one measure of scale (0) regarding one or moreof the plurality of financial objects or one or more of the plurality ofthe entities (E) associated with the corresponding financial objects; atleast one of the at least one processors adapted to retrieve by the atleast one analysis host processor one or more of the data (D) about theplurality of the entities (E) and the corresponding financial objects;at least one of the at least one processors adapted to receive auniverse of the financial objects; at least one of the at least oneprocessors adapted to select a subset of the universe based on anymeasure of scale of the entities of the financial objects to obtain asubset of the universe; at least one of the at least one processorsadapted to select a plurality of financial objects of the subset basedupon at least one accounting data related to the entities of thefinancial object to obtain a plurality of constituent index assets ofthe ADBI; and at least one of the at least one processors adapted toweight said plurality of financial objects based upon at least oneaccounting data related to the entities of the financial object toobtain a plurality of constituent weightings of the financial objects ofthe ADBI; b) purchasing, by the at least one processor based on userinput, a portfolio of financial objects by at least one trading hostcomprising at least one processor, said portfolio of financial objectscomprising the plurality of constituent assets of the ADBI in proportionto the constituent weights of the ADBI received; and c) altering, by theat least one processor based on user input, said portfolio of financialobjects by said at least one trading host comprising said at least oneprocessor, when the ADBI received from the index provider changes overtime, said altering comprising at least one of: i) purchasing by said atleast one trading host at least one of: constituent financial objects ofthe ADBI, or any new constituent financial objects of the ADBI overtime; ii) purchasing by said at least one trading host any additionalconstituent financial objects based on changes in the constituentweights of the constituent financial objects making up the ADBI overtime; iii) selling by said at least one trading host any previousconstituent financial objects no longer components of the ADBI overtime; or iv) selling by said at least one trading host any previousconstituent financial objects necessitated by changes in the calculatedweights of the constituent financial objects over time.